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Embraer's Bigger Plans

Embraer sees the opportunity in midsize jets.

The Farnborough International Exhibition and Flying Display air show, one of the premier events in the aviation industry, runs this week, and aerospace giants Boeing(NYSE:BA) and Airbus are dominating the headlines as they trade jabs over trade policy and government subsidies.

Keeping a much lower profile, Brazilian airplane maker Embraer(NYSE:ERJ) quietly announced Monday that it confirmed two more options for its 70-seat 170 aircraft from Republic Airways Holdings(NASDAQ:RJET).

The 170 is a member of Embraer's latest and largest class of aircraft that includes three other designs, with the biggest model having capacity for 110 passengers. The new family is targeted at what the airplane maker calls the "70 to 110 seat gap." Embraer asserts that in some markets, airlines are using aircraft that are either too big or too small to remain competitive, and that carriers need to "rightsize" capacity to optimize profitability. In addition, the firm says one-third of the jet fleet offering seating for between 61 and 120 passengers is more than 20 years old and due for replacement.

For new or small airlines and regional outfits looking to expand, Embraer's points seem to make sense. Its new jets share 89% of their components, so they should be attractive for buyers hoping to keep maintenance costs reasonable as they buy into progressively larger airplanes. It's also hard to dispute that older jets will need to be replaced.

Embraer's logic may not follow in all cases, though. Suggesting that larger operators need to diversify their fleets to stay competitive seems to fly in the face of a strategy that has helped discount carriers achieve success. Southwest Airlines(NYSE:LUV), for instance, has maintained low costs in part by standardizing with the Boeing 737. Further, Embraer will no doubt see competition from its traditional rival Bombardier, as well as from Boeing and Airbus.

Still, the Brazilian outfit has its proponents. JetBlue(NASDAQ:JBLU) has agreed to purchase 100 planes, and struggling US Airways(NASDAQ:UAIR) also has Embraer craft on order. With conditions for the airline industry looking up, and the sector splintering into smaller upstarts, Embraer could see some tailwind.